There are now fewer than 30 days before the United States could "plunge" off the fiscal cliff. It looks like both sides are back to the same respective positions they had about one year ago. There is not much time left in this game of "chicken" and what some investors may not yet realize is that with the holiday season approaching even before the fiscal cliff deadline, Congress could be "out" for the rest of the year in less than three weeks.
Both sides can make a case for holding firm on their positions based on the election results, and both sides might truly believe in their cause. However, that attitude and the short amount of time left makes finding a resolution increasingly less likely. That means the markets could start to really sell off in the next couple of weeks and create a solid buying opportunity. Based on what little progress is being made, it seems that one possibility would be for the President and Congress to agree on kicking the can once again and extending the deadline for the fiscal cliff. This type of extension might come at the last minute and only after a potential market correction and buying opportunity occurs.
If this is the way it plays out, we could see a sharp drop in certain stocks that are more prone to fiscal cliff risk. Typically this would be companies that are highly sensitive to the economic cycle and companies that are dependent on consumer confidence and spending. These companies could be impacted if negative headlines about the fiscal cliff continue to dominate and even get worse during the critical holiday shopping season. Here are a few stocks that might drop significantly in a fiscal cliff plunge or near-plunge, and that could be a solid buying opportunity for longer-term investors:
Caterpillar, Inc. (CAT) shares have been in a downtrend for the past several weeks and it now trades near 52-week lows. A range of concerns have been impacting this stock, which include economic weakness in Europe and China, and the belief that a double-dip recession could occur if the United States heads over the fiscal cliff. It also did not help that Caterpillar announced it would reduce guidance to a range of $12 to $18 per share for earnings in 2015. Since Caterpillar manufactures a variety of heavy machinery, which is used in industries such as construction, farming, mining, heavy infrastructure and others, it is highly sensitive to the global economy. Some areas like coal and iron ore mining have come under pressure and that appears to be impacting sales for companies like Caterpillar. Iron ore has seen lower demand from countries like China. Coal has been hit by very low natural gas prices and that has caused utilities and other large energy users to use less coal and more natural gas. On the more positive side, housing trends are improving in the United States and that could lead to more construction equipment sales. Analysts are expecting earnings to drop from about $9.10 in 2012, to around $8.69 in 2013, so the stock might languish for a while. However, if the share price takes a big hit in a potential fiscal cliff plunge, it could be a buying opportunity for longer-term investors.
Here are some key points for CAT:
Current share price: $84.22
The 52-week range is $78.25 to $116.95
Earnings estimates for 2012: $9.10 per share
Earnings estimates for 2013: $8.69 per share
Annual dividend: $2.08 per share, which yields 2.4%
Ford Motor Company (F) could be hit hard if we plunge off the fiscal cliff. According to Lacey Plache, chief economist for Edmunds.com, a failure to reach a deal could cause car sales to drop by 10% to 20% off of estimates for unit volumes of about 15 million for 2013. That could really hurt U.S. automakers like Ford and General Motors (GM), which have been counting on strength in North America to offset weak sales and losses in Europe. Part of a fiscal cliff deal could involve government spending cuts and that might lead to reduced government sales of trucks and autos. Lack of a deal would raise taxes for many Americans and reduce consumer confidence, which could cause individuals and small businesses to postpone major purchases like buying a car. On the positive side, Ford has a very strong management team led by CEO Alan Mulally and the company has continued to make progress on improving its balance sheet and credit rating in the past couple of years. This has allowed it to re-instate a dividend in 2012 of 20 cents per share. Ford shares trade for just about 8.5 times earnings, which is reasonable. However, it could head back closer to the lows it hit in September of about $9 per share, if the fiscal cliff deal fails and hurts auto sales as described above. That would be another buying opportunity for long-term investors.
Here are some key points for F:
Current share price: $11.41
The 52-week range is $8.82 to $13.05
Earnings estimates for 2012: $1.34 per share
Earnings estimates for 2013: $1.46 per share
Annual dividend: 20 cents per share, which yields about 1.7%
MGM Resorts International (MGM) is one of the world's largest hotel and casino companies with properties like Bellagio, New York-New York, Mandalay Bay, The Mirage, Monte Carlo, Aria, and others. Due to this range, MGM is able to target families, middle class consumers and high-rollers. This company has one of the strongest brand names in the industry, which gives it expansion potential both in domestic and international markets. However, most of its revenue comes from Las Vegas. That means it is highly dependent on the U.S. consumer, who might retrench if we go off the fiscal cliff. Even if there is a deal, taxes could go up on the wealthy and cause a slowdown with high-rollers, and without a deal, consumer confidence could fall sharply and cause fewer Americans to travel to Las Vegas. Any decline in consumer spending and a potential double-dip recession that could come with going over the fiscal cliff could exacerbate concerns over the debt load at MGM. This company has about $13.83 billion in debt and around $2.56 billion in cash and since it has posted losses in recent quarters, investors need to keep watch over the financial results. This business is highly dependent on consumer spending and even corporations with convention spending, so it could trade down if a fiscal cliff deal is not found soon. That could be a short-term trading opportunity or a good entry point for longer-term investors because of MGM's brand name and valuable properties.
Here are some key points for MGM:
Current share price: $9.90
The 52-week range is $8.83 to $14.94
Earnings estimates for 2012: a loss of 66 cents per share
Earnings estimates for 2013: a loss of 54 cents per share
Annual dividend: none
Data sourced from Yahoo Finance. No guarantees or representations are made.
Disclaimer: Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
Disclosure: I am long F.